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History of Invoice Factoring

We have been dealing of numbers here and anything that will relate to business finance. It's time to discuss one of the common ways used by start up companies in financing their business which is Factoring.

I found a factoring blog which talked about the History of Invoice Factoring. I quoted some details below:

Elements of factoring can be traced back to the Mesopotamians, who are credited with being the cradle of civilization and the first to generate business code structures and government regulations for commerce. Experts have evidence that proves 4,000 years ago, the Mesopotamians also created the concept of factoring. Following Mesopotamia, there is evidence that the Romans sold promissory notes at discounted prices. Roman merchants also enlisted the services of collectors to settle trade debts. But factoring as we know it today got its start in the Middle Ages.

By the time English colonists settled in the new world, America, this type of financing had become common. Both English settlers in the new world and English merchants were in prime situations to make lots of money. Due to the time distance in getting their goods, by boat, from the colonies back to England and vice versa, these merchants could have gone bankrupt waiting on their money. Cotton, timber, fur and tobacco industries all spurned their own factoring segments. Merchant bankers in London advanced funds to colonists for goods and materials before they made the journey across the ocean. They would ship their goods to the colonists or back to England where one of these factors would pay a discounted rate to the seller before the voyage and afterwards take a percentage for selling and collecting the money owed.

Factoring became a common business practice. Until the 1700s, England and the US shared a common law framework. Originally, English law forbade the selling of invoices unless the debtor was notified in advance. Of course, the United States developed its own government. In the late 1940s United States almost wholly adopted non-notification factoring arrangements and witnessed a boom in factoring in textile industries and transportation industries.

This article about History of Invoice Factoring is written by Thomas Mc Carthy. He emphasized on the first part of his article that "The only thing more destructive to business survival than lack of customers is lack of cash flow to produce goods and provide services in a high demand market, Consistent cash flow is the lifeblood of commerce and the catalyst for healthy economies."

2 comments:

This is a great article explaining the origins of factoring. The only thing that I would add is that because of article 9 of the UCC, factoring companies are now required to notify debtors that receivables have been sold.